Is Now the Time to Consider Alternative Investments in Your Portfolio?

Most people are familiar with traditional investments, such as stocks and bonds; however, alternative investments may be foreign to many investors. Although alternative investments can be traced back to the 1800s, they gained notoriety in the 1980s to protect assets from market volatility¹.

What are alternative investments?

An alternative investment (also known as Alts) is an investment that falls outside of traditional stocks, bonds and cash; hence, it is an “alternative” to stocks and bonds. The most known form of an alternative investment is real estate; however, some other forms include commodities (gold, oil, agricultural), art and antiques and private equity.

Types of Alternative Investments

Alternatives fall into two broad categories: public and private investments.

Real Estate Investment Trusts (REITs) are public alternatives that may be familiar to many investors. They provide an attractive yield and can adjust rental income, making them a great hedge against inflation.

However, studies show that investing in private investments through private equity firms has the potential to provide even higher returns and is appealing to investors seeking long-term growth. Of course, the potential of higher returns comes with higher risk. Therefore, it is important to do proper due diligence and understand the associated risks. For example, these firms invest in assets ranging from private real estate and debt to oil and gas and contain lock-up periods restricting when you can sell the investment and convert it to cash. Thus, they are illiquid.

Why invest in alternatives

Investing in alternatives helps to protect your portfolio during periods of market volatility because they are generally uncorrelated with stocks and bonds. This means they may hold their value or even appreciate during a market downturn. As a result, alternatives provide diversification when combined with stocks and bonds; and therefore, can help smooth out returns. For example, in 2022, both stocks and bonds (which are historically thought of as a safer investment) declined by double digits as inflation peaked and the Federal Reserve increased interest rates, but the average alternative was only down less than 3%².

Why alternative now?

Due to their liquidity constraints and lack of regulation, the landscape has changed considerably from when only wealthy and institutional investors had access to alternative investments.  However, recent changes have improved transparency, reporting and regulations to help protect investors. In addition, alternatives continue to evolve and are becoming more liquid, enabling individual investors to participate in this growing asset class.  

Given current economic conditions, the uncertainty around tariffs and geopolitical risks, the benefits of a diversified portfolio are more important than ever. Adding alternative investments to your portfolio can mitigate risk, enhance potential returns and provide a hedge against inflation.

In today’s unpredictable economic landscape, it’s an ideal time to consider the benefits of alternative investments for your portfolio. By diversifying your assets and including alternatives, you can better prepare for market volatility while potentially increasing your returns. Consult with a financial advisor to explore the opportunities available to you to create a more dynamic and secure investment strategy.

¹Kelly+Partners Team, “History of Alternative Investments”, kellypartners.com, (2024, October 10), History of Alternative Investments.

²Katherine Lynch, “Alternative Funds Are Winners in 2022”, Morningstar.com, (2022, December 8 ), Alternative Funds Are Winners in 2022 | Morningstar.